If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Trilogy International Partners (TSE:TRL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Trilogy International Partners, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00091 = US$649k ÷ (US$935m - US$228m) (Based on the trailing twelve months to September 2020).
Therefore, Trilogy International Partners has an ROCE of 0.09%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 3.8%.
In the above chart we have measured Trilogy International Partners' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Trilogy International Partners here for free.
How Are Returns Trending?
On the surface, the trend of ROCE at Trilogy International Partners doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 0.09%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.On a related note, Trilogy International Partners has decreased its current liabilities to 24% of total assets. Considering it used to be 78%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
We're a bit apprehensive about Trilogy International Partners because despite more capital being deployed in the business, returns on that capital and sales have both fallen. We expect this has contributed to the stock plummeting 77% during the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing, we've spotted 1 warning sign facing Trilogy International Partners that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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